Tax reform needed to boost university finances

The World Bank and UNESCO’s report, Education Finance Watch 2021, indicates that the COVID-19 pandemic has caused cuts to external education aid and education budget cuts in two-thirds of low- and middle-income countries.

University World News asked higher education experts how the higher education finance challenge outlined in the report should be tackled, using domestic resources with special focus on permanent practical solutions to deal with the expected long-term poor university finance resulting from the pandemic.

Jamil Salmi, a tertiary education expert and former World Bank tertiary education coordinator, said the economic crisis resulting from the COVID-19 pandemic has highlighted “structural bottlenecks” in the way universities have been traditionally funded.

“Public universities that rely almost exclusively on government budgetary resources are vulnerable when fiscal resources are constrained, as is the case today,” Salmi said. “Private higher education institutions totally dependent on tuition fees are even more vulnerable, and many are likely to close down over the next few years.”

Professor Juma Shabani, the director of the doctoral school at the University of Burundi and former director of development, coordination, and monitoring of UNESCO programmes with a special focus on Africa, said a new tax system is needed.

“African countries need to develop new tax systems to face the long-term shortage of funds for promoting teaching and research at African universities, and to contribute to laying the foundations for a more robust public and higher education funding landscape as well as making universities accessible, sustainable and productive,” he said.

In view of the Middle East and North Africa economic crisis resulting from the combination of the COVID-19 health crisis and the collapse in oil prices which led to a decrease of 5.2% in the forecasted regional per capita GDP in 2020, public financing for higher education is likely to be constrained for the next few years.

However, no figures on sub-sector allocations are available for the 2020 or 2020-21 fiscal year(s), according to a February 2021 World Bank-UNESCO report about the impact of the pandemic on the Middle East and North Africa.

Tax research and future workforces

Professor Adipala Ekwamu, the executive secretary of the Regional Universities Forum for Capacity Building in Agriculture (RUFORUM) in Uganda, said that the severe impact of COVID-19 on the education sector calls for introspection, finding solutions internally and taking advantage of strength in numbers.

“African universities need to come together and identify their strengths, rationalise resource use and partner for a common good to build effective, equitable, and resilient higher education systems,” he said.

Ekwamu added that partnerships among African universities and institutions must be strengthened “to harness the comparative advantages of different universities across the continent”.

Shabani said African universities must carry out joint research to formulate effective policies for reforming the existing tax system. At the same time, future tax professionals, experts and leaders must be prepared, and the tax profession transformed and empowered.

He suggested that African universities join forces with national and regional tax institutions to carry out tax research and guide the developing scientific workforce where best practice is concerned.

Best tax practices

“African countries must learn from national, regional and international best practices in tax systems to enhance university financing,” Shabani explained.

For example, the February 2020 executive for Egypt’s tech and innovation authority allowed the authority to commercialise the output of research projects at higher education institutions and scientific research centres and set up independent companies that will be exempt from tax and customs duties.

Besides exempting foreign funds from taxing for scientific projects, companies and individuals can finance scientific research projects within universities and technological centres. These funds will be deducted from industrial and commercial profit tax for companies and from net taxable income for individuals.

Tax-free university spin-off companies

“With an eye toward how to stem financial losses of billions of American dollars that escape financial regulations on the African continent, harming public revenue, African universities must start looking for an active role in establishing companies to bring new findings to the public in practical applications,” Shabani suggested.

He emphasised applications linked to achieving sustainable development goals as well as national and regional priorities.

“Investment in these university companies should be open for investors with conditions similar to [those in] tax haven or tax shelter countries that could in practice work in an African context,” Shabani pointed out.

Besides cooperation with the African Research Universities Alliance that is intended to develop local research excellence through collaboration to find solutions to the development problems of Africa, this collaboration between universities and the private sector could be enhanced by establishing ‘business incubators’ within universities to provide a launching pad for start-ups or spin-off companies, he said.

Poor African countries face losses of an estimated US$1 trillion due to financial secrecy. This is five times that of the US$200 billion these countries owe as their total external debt, according to the Financial Secrecy Index 2020 published by the Tax Justice Network.

A tax haven or offshore financial centre is any country or jurisdiction that offers minimal tax liability to foreign individuals and businesses that allow them to avoid paying income taxes in their countries of residence, according to the Corporate Finance Institute.

New tax policy

Expanding further, UNESCO Science Prize laureate Atta-ur-Rahman, former coordinator general of the standing committee on scientific and technological cooperation of the 57 member states of the Organisation of Islamic Cooperation, 27 of which are in Africa, said the African countries need to pass a law that any donations made to universities will be considered tax free.

“Another law should also be passed making it mandatory for at least 1% of profit to be donated to universities for companies that have 20 or more employees,” Atta-ur-Rahman said.

“With these two laws in place, huge funds can flow into universities and strong knowledge economies can be developed. France has such a law and, as a result, huge private donations are given to educational institutions,” he pointed out.

The way forward

Wondwossen Belete, the president of the Ethiopia-based Society for Technology Studies, said ignorance on the part of government and industry about the full range of tasks of a university is one of the major factors hampering the flow of finance to African universities. They also do not understand the economic payoffs linked to investment in university research.

“Universities in Africa, therefore, should do more to demonstrate their potential to influence industrial innovation and to stimulate national economic development,” Belete said.

He is also a member of the African policy, research and advisory group on science, technology and innovation of the Ethiopia-based United Nations Economic Commission for Africa.

Belete said universities should put in more effort to bring the key role universities have in the creation of new knowledge to policymakers’ attention. This role also includes addressing societal needs and market demands.

“Following that, careful thought will be given to university demands in the formulation of policies, including tax policy,” he said.